China will delay allowing local investors to buy Hong Kong shares directly until rules have been introduced to limit capital outflows, according to three officials of the China Banking Regulatory Commission (CBRC).

The State Council of the People’s Republic of China blocked the introduction of the share purchasing programme, announced 20 August by the State Administration of Foreign Exchange, after objections were made by securities and banking regulators, said the officials, who did not wish to be identified.

China’s shares have quadrupled in the past year and valuations are triple those in Hong Kong.

Easing controls too rapidly may lead to an exodus of funds from the Shanghai and Shenzhen stock markets and increase financial risks. China prevents individuals from investing overseas under restrictions designed to keep its currency, the yuan, stable.

Hong Kong’s Hang Seng Index has climbed 18% since the foreign exchange regulator’s announcement and on Wednesday closed above 24,000 for the first time, while the Hang Seng China Enterprises Index, which tracks the so-called H shares of 41 mainland companies listed in the city, jumped 30%.

Hong Kong-listed shares are surging on speculation China’s households will pour some of their 17 trillion yuan (Rs93.4 trillion) of savings into the city’s equities once restrictions are relaxed. The gains may be premature, said Hugh Young, who oversees $50 billion as chief executive of Aberdeen Asset Management Asia Ltd.

“I wonder if people are getting a little too enthusiastic a little too soon," Young said on Wednesday in Hong Kong. “There’s a risk" of a bubble developing, he added.

The Hang Seng Index and the H-share index are valued at 16 times and 22 times reported earnings, compared with 52 times for China’s CSI 300 Index. All 42 Chinese companies, whose shares are listed in both Hong Kong and the mainland, are cheaper to buy in Hong Kong, with 19 trading at less than half the price of their China-listed stocks.

The government has been loosening controls gradually as record trade surpluses drive up the nation’s foreign exchange reserves—the world’s largest at $1.3 trillion—and complicate efforts to cool the world’s fastest growing major economy.

China last year started allowing banks and brokerages to invest outside of the mainland under the so-called qualified domestic institutional investor (QDII) programme. These investments will also be subject to any new policy regulating capital outflows, according to the three officials at the China Banking Regulatory Commission.

China’s currency regulator said last month that it will allow individuals holding accounts at Bank of China Ltd’s branch in Tianjin city to buy Hong Kong stocks for the first time. It didn’t specify an investment quota or say when the plan could start.

The lack of specifics didn’t deter Li Chuansen. The 54-year-old former Shanghai Electric Group Co. employee said he sold his Shanghai apartment to raise money to buy Hong Kong stocks.

Li flew this week to Tianjin with 150,000 yuan ($19,867) cash and opened a Hong Kong dollar account at a Bank of China branch next to the city’s Olympic stadium to buy the Hong Kong-traded shares of Aluminium Corp. of China Ltd (Chalco), he said. Chalco’s Hong Kong shares closed at HK$20.25 on Wednesday and its mainland stock at 51.49 yuan, equivalent to HK$53.16.

“I plan to invest all my HK$150,000 on Chalco" because “I like resource companies," Li said in a 3 September interview in Tianjin. “I will only buy Chinese stocks that are also traded in Hong Kong because I’m familiar with them and there are big price gaps."

Xiao Gang, Bank of China chairperson, said on 23 August the Beijing-based lender will expand its transaction services for Hong Kong stocks to customers in 40 major Chinese cities. The bank’s president Li Lihui said the plan will be expanded gradually, without giving a timeframe.

China-listed shares may “tumble" once the investment plan is extended beyond Tianjin, investor Li said. “Part of the money will be withdrawn from the Chinese stock market to go to Hong Kong," he added.

Chinese individuals, who hold at least 300,000 yuan in bank accounts in Beijing, Tianjin, Shanghai and Guangzhou, will be able to buy Hong Kong stocks “within one or two months," the state-owned China Securities Journal said on Wednesday, citing an unidentified government official. Bloomberg